What Is An eCheck? A Guide To Electronic Checks For Small Business
An eCheck is a digital version of a paper check. Learn more about how eChecks work with your small business.
While looking for alternative payment methods, you may have come across the term “eCheck,” especially in the context of high-risk industries.
Since most people don’t use eChecks in their day-to-day lives, we thought it might be helpful to provide a detailed answer to the question: what is an eCheck? We’ll also take a look at how eChecks are used and whether they’re a good fit for your small business.
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What Is An eCheck?
An eCheck is — exactly as the name suggests — the electronic form of an actual paper check. It works and follows the same process flow as paper checks, a process that has been in place for hundreds of years.
Long gone are the days when paper checks needed to be physically moved between financial institutions or a central bank for processing. Instead, the merchant or the bank that takes the deposit can transform the check into an electronic form, an eCheck, and send it that way. However, eChecks never have to be in paper format in the first place — the writer of the check could “write” an eCheck using special software and send it to a merchant, who then deposits the eCheck with the bank, all in electronic format.
eChecks Vs. ACH
It’s not unusual to see ACH payments and eChecks mentioned together.
Many of the best ACH payment processors offer eCheck services as well. If you do an internet search and read through some of the articles, you’ll see that there seems to be confusion about the difference between the two, and some even suggest that there’s no difference at all. This is not the case.
ACH can be part of the eCheck process. ACH is specific to the US and is the most popular way banks transfer money to each other via the US Federal Reserve. So within the US, that last part of the eCheck process where the banks transfer money to each other to square the funds will typically be made with an ACH transaction. eChecks, though, are still checks and are governed by a different set of laws.
To confuse things even further, eChecks can be changed into an ACH payment by the merchant before the check is deposited with the bank as long as proper notice is given to the consumer. This is why the two are often confused with each other. But make no mistake, they’re separate payment instruments under the law.
eCheck VS Credit Cards
Because eChecks bypass the card networks — and use their own systems and abide by their own set of rules — there are several advantages to accepting them over credit cards:
- Lower cost to process (can also be lower than debit cards, depending on your pricing model)
- Convert your recurring customers to a less expensive processing method
- Reduce declined recurring payments due to expired card information
- Harder for customers to file chargebacks
- Shorter period for customers to initiate chargebacks
- Increase reach to consumers who can’t or won’t use credit cards
- Offer an additional payment method your competition may not offer
- Bypass high-risk industry restrictions
How Do eChecks Work?
From a consumer’s standpoint, eChecks work like regular checks. Sometimes, a bank’s “bill pay” feature will pay out via an eCheck (and other times via an ACH payment), but the consumer typically has no control over that. A consumer can also go on a merchant’s website (or call the merchant) to give bank routing information and authorization, and an eCheck can be made that way.
From a merchant’s standpoint, your customer can sometimes use the bill pay feature at their bank to send an eCheck to you, but they’ll need your bank’s routing number and your account number. You can also subscribe to an eCheck service (typically through a payment processor, and you must have a gateway) to have a dedicated and secure webpage for a consumer to type in their bank routing number and account number. Some merchants scan a paper check received through the mail to transform it into an eCheck before depositing the check, either by special scanners or through smartphone mobile deposit.
If you send electronic invoices, you can insert a link from the invoice to your dedicated secure echeck page. Lastly, you can take eChecks through the phone or mail order, verbally getting the customer’s banking information and voice authorization, and typing this information into your virtual terminal.
eChecks can be used for both single and recurring payments.
How Much Do eChecks Cost?
If you’re using a simple remote deposit capture setup without any conversion to ACH, you may be able to use a check scanner app on your phone or invest in check scanning hardware for higher volumes. These machines can cost several hundred dollars, but some banks may provide the scanner and charge a monthly fee instead. You could also incur a per-check fee.
If you’re converting eChecks directly into ACH payments before forwarding them for processing, you may need to be underwritten for an ACH processing account. You can read more about that in our guide on how to accept ACH payments. Transparent providers often publish standardized ACH rates and fees that most lower-risk merchants will receive.
For eCheck payments, here are some common rates you might see:
- Free up to a certain number/amount (for remote deposit capture)
- Free with a credit card processing account
- Flat fee (average $0.20-$1.50 per transaction)
- Percentage fee (average 0.5%-1.5%)
- Flat fee + percentage fee
Note that any of these average figures may run higher for high-risk merchants.
What Businesses Benefit Most From eChecks?
If you have a high-risk business, you may not qualify for ACH processing initially, let alone credit card processing. Credit card processors don’t often want to work with high-risk businesses because of high chargeback rates, among other things, but that’s true of ACH too. Setting up an ACH processing account requires its own underwriting process with stringent guidelines, similar to merchant accounts for credit card processing. For example, NACHA rules dictate that you must keep your ACH chargeback ratio below 0.5% and your ACH return rate below 15% or else risk account closure.
So with a high-risk business, if you can’t take credit cards or ACH payments, how do you do business online? The solution lies in using eChecks in a very strategic way, a way that a high-risk specialist processor can help you set up.
When you receive an eCheck, the funds are first deposited into an aggregate account held by the processor. An aggregate account is a method of mitigating risk since the large volumes of transactions that are deposited into the account every month help offset any chargebacks or checks showing non-sufficient funds (NSF). Once your funds have cleared, the eCheck processor initiates an ACH transfer into your business account. Your primary business operating account is never put in jeopardy of a shutdown since your bank only ever sees perfectly cleared and settled ACH transactions. Using this clean record will make it easier for your business to get a full ACH or credit card processing account.
Are eChecks Right For My Small Business?
Checks might not sound all that modern, but they’re still an important part of the payments world, especially when transmitted electronically. With the high cost of credit card processing for you and the demand for multiple payment options for your customers, echeck payment acceptance could be a good add-on or alternative for your business, especially for high-risk industries that may not meet Nacha’s guidelines for straightforward ACH processing.
For everyone else, eChecks probably fall into the “nice to have” category, though they’re unlikely to make or break your operations.